Morningstar Market Commentary: Third Quarter 2008

Financial markets witnessed unprecedented turbulence in the third quarter of 2008, as many a haloed financial institution was brought down to its knees. The U.S. government took a number of initiatives to prop up the markets but failed to quell market fears and bolster investors' confidence.

The Morningstar US Market Index dropped a whopping 8.9% for the quarter and is down 18.7% for the year. The bond market put in a mixed performance, with the Morningstar Core Bond Index up 0.13% for the quarter. And commodities, which tend to exhibit low correlations with stocks and bonds, had a mighty fall. The Morningstar Long-Only Commodity Index dropped 28%.

Some of the key observations:* An ugly quarter for stocks. The troubles of the financial sector spread across the broader economy, as cost of capital skyrocketed. Notwithstanding the terrible quarter for stocks, there was a marked difference in the performance of different style categories. Value stocks fared considerably better than growth, as the Morningstar US Value Index outperformed the US Growth Index by more than 11% for the quarter.

* Bonds eke small gains. A flight to quality contributed to modest gains for government bonds. By contrast, the Morningstar Corporate Bond Index dropped 7.32% for the quarter, as spreads in yield between corporate and government bonds were at historically high levels.

* Commodities bulls turn into bears. Prospects of slowing global growth knocked the wind out of commodities as the Morningstar Long-Only Commodity Index shed 28% for the quarter.